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Furniture Forecast From BDO Seidman - March 2006

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Monthly Forecaster New Orders. According to our most recent survey of residential furniture manufacturers and distributors, new orders in January 2006 increased 6 percent over orders in January 2005─a good start for the New Year. New orders were up 9 percent over December 2005 results. Normally, orders are up in January over December, but this month’s results were better than normal. Over 58 percent of our participants reported increased order levels with several reporting healthy double-digit increases. This is compared to only 35 percent of the participants reporting increases in December 2005 over December 2004. Shipments and Backlogs. Shipments in January were basically even with January 2005, but fell 9 percent compared to December. The decline from December is somewhat normal as there was a 10 percent decline in January 2005 compared to December 2004. Approximately 46 percent of the participants reported increased shipments in January compared to January 2005. This percentage compares favorably to the 30 percent reported in December and 40 percent in November 2005. With orders up and shipments relatively flat, backlogs increased 10 percent over December levels and were up slightly over last January. Receivables and Inventories. Receivables levels were essentially unchanged from January 2005, in line with shipments. Receivables fell 3 percent from December, somewhat less than the decline in shipments, but this imbalance is also somewhat normal, starting off the New Year. Inventories in January were 1 percent lower than January 2005 levels and were basically even compared to December. These levels were consistent with the latter part of 2005 results. Factory Payrolls and Employment. Factory payrolls fell 14 percent compared to December, but again that is somewhat normal with December payrolls including year-end vacation and bonuses. Last month, December payrolls were 14 percent higher than November. The number of factory employees was even with December levels and were 5 percent lower than January 2005 levels. This is consistent with the decrease reported in December and also consistent with the reported 8 percent reduction in factory payrolls comparing January 2006 to January 2005. National Gross Domestic Product─According to final estimates by the Bureau of Economic Analysis, real gross domestic product─the output of goods and services produced by labor and property located in the U.S., increased at an annual rate of 1.7 percent in the fourth quarter 2005. This increase compared to a 4.1 percent increase in the third quarter. The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, equipment and software, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in PCE, an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in inventory investment and an acceleration in exports. Economic Indicators The Conference Board reported that the U.S. leading index decreased 0.2 percent in February, while the coincident index increased 0.3 percent and the lagging index increased 0.1 percent. The decrease in the leading index followed four consecutive increases. The index had increased 1.5 percent from August of 2005 (an annual rate of 2.9 percent). Five of the ten indicators increased in February─manufacturers’ new orders for non-defense capital goods, real money supply, average-weekly manufacturing hours, manufacturers’ new orders for consumer goods and materials and interest rate spread. These increases were more than offset by vendor performance, index of consumer expectations, average weekly claims for unemployment insurance (inverted), building permits and stock prices. All four indicators in the coincident index increased in February, led by industrial production and employees on non agricultural payrolls. Consumer Confidence The Conference Board reported that the Consumer Confidence Index increased in March after a decline in February. The index now stands at 107.2 compared to 102.7 in February. The Present Situation Index rose to 133.3 up from 130.3. The Expectations Index improved to 89.9 from 84.2 in February. “This month’s gain in Consumer Confidence has pushed the Index to a near four-year high (May 2002, 110.3),” says Lynn Franco, Director of The Conference Board Consumer Research Center. “The improvement in consumers’ assessment of present-date conditions is yet another sign that the economy gained steam in early 2006. Consumer expectations, while improved, remain subdued and still suggest a cooling in activity in the latter half of this year.” Housing Total existing home sales (including single-family, town homes, condos and co-ops) increased 5.2 percent in February to an annual adjusted rate of 6.91 million units according to the National Association of Realtors (NAR). This followed five months of decline. February’s rate was 0.3 percent below February 2005 levels. Single family homes increased 4.7 percent to a seasonally adjusted rate of 6.06 million and were 0.2 percent below the February 2005 pace. The median existing single-family home price was $208,500, up 11.6 percent from a year ago. Sales of existing homes were up in all regions except the South where sales fell 2.5 percent, but were still 3.1 percent higher than a year ago. David Lereah, NAR’s chief economist, says mild weather appears to be responsible for some of the gain. “Weather conditions across much of the country were unseasonably mild in January and likely were a factor in higher levels of buyer activity, which boosted sales that closed in February,” he notes. “Higher interest rates had been tapping the brakes, notably in higher-cost housing markets since mortgage interest rates trended up last fall, but we’re seeing signs of stabilization in the market now with the sales rebound. Home sales should level-out in the months ahead.” Sales of new one-family houses fell 10.5 percent in February from January according to the U.S. Census Bureau. The seasonally adjusted rate of 1,080,000 was 13.4 percent lower than February 2005 estimates. The inventory of these homes was estimated at 6.3 months supply based on the current sales rate. Most of the decline in new home sales was in the West where they dropped 29.4 percent and the South where they declined 6.4 percent. The Northeast and Mid-west actually reported increases. Single family housing starts were at a seasonally adjusted annual rate of 1,800,000. This was 2.3 percent below January estimates. Employment Non-farm payroll employment grew by 243,000 in February according to the Bureau of Labor Statistics. Job gains were noted in construction, financial activities and health care. The unemployment rate was at 4.8 percent up slightly from January’s rate of 4.7 percent. The number of unemployed persons was reported at 7.2 million. This compared to 8.0 million in February 2005 and an unemployment rate of 5.4 percent. Retail Sales and Consumer Prices The U.S. Census Bureau reported that advance estimates of U.S. retail and food service sales for February indicated a decrease of 1.3 percent from January, but an increase of 6.7 percent over February 2005. Total sales for the three months ended February were 7.3 percent higher than the same period a year ago. Retail trade sales were also down 1.3 percent from January and were up 6.7 percent over a year ago. Similar to recent months, the leaders were sales at gasoline stations and building material and garden equipment and supplies dealers. For furniture and home furnishings stores, the report indicated that sales were 6.9 percent higher in February 2006 than February 2005. Sales for the two months of 2006 were 9 percent higher than the same period a year ago. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in February (0.1 percent after seasonal adjustment) according to the Bureau of labor Statistics. The increase followed a 0.7 percent increase in January. Energy costs, which increased 5.0 percent in January, declined 1.2 percent in February. The index for all items less food and energy rose 0.1 percent in February following a 0.2 percent increase in January. Durable Goods Orders and Factory Shipments New orders for manufactured durable goods increased 2.7 percent in February. This marked the fourth month of the last five that orders were up. Transportation equipment had the largest increase with non-defense aircraft and parts leading the way. Excluding transportation, new orders decreased 1.3 percent. Excluding defense, new orders increased 0.3 percent. Shipments of manufactured durable goods increased 0.2 percent. As with orders, this marked four of the last five months where shipments have increased. Computers and electronic products had the largest increase. Summary The results for new orders were good in January. Based on our conversations, February was not necessarily great for many while March has picked up a little. It seems that the industry is back into the mode of a good week or so, then a tail off, then a pick back up again. Our latest forecast has reduced expectations for 2006. We are now forecasting a flat to slightly down first half with a 2 percent increase in the second half of the year, resulting in about a 1 percent gain for the year. With most companies putting in price increases, this seems to indicate that units will likely be down somewhat. Most of this relates to a couple of factors. With more retailers buying imports direct from overseas, the domestic producers and importers are not getting all the growth at retail. In addition, the economy seems to be slowing down in total as interest rates and gasoline prices are having an impact on consumer spending. As we have discussed with several in the industry lately, business is not all bad for many companies, but is not good for others. It really seems to depend on what customers you are selling, what areas of the country you are doing business in and what products you are selling. The old saying goes, “a rising tide lifts all boats.” In the case of the industry, the saying may be true, but it appears that all of our boats are not on the same bodies of water. Accordingly, the tide is not rising everywhere. We hope you are sailing in the right waters. Hopefully as spring brings good weather, good business will follow. About BDO Seidman: BDO Seidman, LLP is a national professional services firm providing assurance, tax, financial advisory and consulting services to private and publicly traded businesses. For more than 90 years, the company has provided quality service and leadership through the active involvement of our most experienced and committed professionals. BDO Seidman serves clients through more than 35 offices and 250 independent alliance firm locations nationwide. Their Furniture Industry Services practice publishes Furniture Insights®. For more information go to http://www.bdo.com.

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